Assessing the Full Risk of New Product Development Projects

Algorithms and Probabilities

Let’s face it. Failure is not fun. Just ask any veteran NPD professional.

You may hear the professional rationalize the failures by what a team learned, or what how the project leader gained valuable experience. Or perhaps the veteran might mention how the failure enabled the organization to create a new “technology option.” But the bottom line at most organizations is that managers must do everything possible to avoid NPD failures. Lessons learned, experience and gaining new options are simply not sufficient.

But how do you increase the likelihood of success and decrease the likelihood of failure? Answer this question and NPD professionals can have tremendous impact on product development. A critical problem faced by NPD Managers, Directors and Executives seeking these answers is that they do not have an adequate tool to figure out the level and true, root- cause of risk on their NPD projects. Overcoming the tool challenge is critical. Read on and you will see that there is a solution, it is easy-to-use and it is quite powerful.

Looking at NPD Risk
Failure may be either absolute or relative. In consumer packaged goods market, if a new product cannot drive enough inventory turns for the retailer, it will be removed from the shelf. That’s an absolute failure. In B2B markets however, a new product may be a definitive financial failure, yet remain in the market. Why? The reason is that a key customer may want to continue buying it. And the logic for accepting such failures is compelling:

Sunk costs are irrelevant. Therefore the thinking is that as long as the product has a positive contribution margin and is satisfying a customer, the organization might as well keep selling it.

Volume lowers unit costs. This justifies the loss of money on each unit sold so long as the goal is to increase volume and thereby drive down per-unit cost enough to yield positive contributions from the product.

Whether the risk is absolute or relative, organizations are best advised to understand and proactively manage the factors contributing to product development risk. And, it is best to do this before the consequences of the risk rear their ugly head.

The common capability level for most organizations today is that NPD teams judge the likelihood of success or failure of their new product development project simply by whether the project team will meet deadlines or the final milestone of a launch date. Risk, though, can play out in several ways on a project, not just in project management tasks. One way is that the expected or desired response in the market does not happen. For example, New Coke was an abysmal failure. Maybe it came in on schedule, but who cares? It was a bad failure, the kind that ends up with the CEO’s picture on the cover of Fortune Magazine, along with a headline like “What Went Wrong?” Abysmal failures are definitely not fun.

Risk, though, does not always link directly to market failures. Very often it does play out through a time dimension. In the simplest explanation, uncertainty (a component of risk) causes time delays for task end-points or causes rework of project tasks altogether. New products may eventually launch, but because of risk may end up late to market. Another route for risk to play out is in economic value. In response to risk, costs increase or margins decline. While project management may have succeeded against timelines, actual sales and contribution margins can degrade the victory.

Measuring Your Project’s Risk
Every NPD team needs to deal with new product risks. Many tackle this straight on. Working together, the members on the team may come to consensus on the level of technical risk and then on the level of commercial risk for their project. They then multiply the two answers to come up with overall project risk. Combined with project task analysis, this is a good step forward and puts organizations on the path of increased capability maturity of NPD risk assessment. But this is only a first capability level. It tends to fall short of helping to analyze specific factors and influences, and contributes nothing to assessing risk across a full portfolio of NPD projects. Fortunately, we know a lot more than this about NPD risk. We can break down both technical and commercial risk into much finer components or factors influencing NPD risk.

Many gurus in NPD suggest that, from a project management point of view and a quality management orientation, you can determine risk by creating probability distributions. Each distribution skewed in one direction or another, would reflect the influences (cost, market demand, competitive response, etc.) on a project. Risk is determined by “simulating” many outcomes through what is known as a Monte Carlo simulation. Products like @Risk[i], CrystalBall[ii], and iDecide[iii] help enormously with such simulations. SmartOrg offers their Decision Advisor[iv], and provides superb support for NPD professionals wishing to create such models.

A simpler and more direct approach to NPD project risk assessment is through pre-determined algorithms, specific to new product development. The way this works may be compared to how banks assess whether they want to give you a loan or not. To make their decision, the bank request information on salary, work history, home value, age, credit ratings, etc. Undoubtedly they care about each one of these factors. More important, though, is the result that they get when they plug these factors into an algorithm that they acquire from a service. The algorithm tells the bank the likelihood that your loan will either succeed or fail. This model based comparison approach is also valuable in new product development.

NPD-RiskAssessorTM
The Adept Group has been working on such a model specific to new product development for roughly 25 years. Starting from a solid base provided through highly cited research by Dr. Robert Cooper[v] an ex-professor at McMaster University in Canada, the model has evolved and advanced to address specific market nuances and qualitative assessments. Today, our Software as a Service tool is known as NPD-RiskAssessorTM.

NPD-RiskAssessorTM and its underlying algorithm have changed and improved to include both empirical, number-based analysis and qualitative team-derived assessments. The NPD-RiskAssessorTM model homes in on key factors that influence the likelihood of success or failure of a project, revealing the degree of influence on success and toward failure related to each risk factor. This enables the team to spot the underlying issues affecting their project negatively and to quickly rank-order the importance of these issues. The tool then helps teams to address the negative influences with specific actions that mitigate the risk. It’s simple, straight-forward and very effective.

NPD-RiskAssessorTM Advancement
In addition, the tool makes it easy to uncover and analyze “systemic risks” which cut across sets of projects or a full portfolio of projects. This is important because it is very difficult for individual teams to mitigate that are systemic in nature. And, senior managers (i.e., those who need to address it) typically have no means to even recognize that such risks exist. The result from NPD-RiskAssessorTM are notable: helping teams peel away complex layers of their projects and build sensible action plans to mitigate project risks, and helping portfolio decision-makers to gain understanding of and take recourse toward systemic risks across their portfolio of NPD projects.

The Adept Group has used the research-based algorithm for many years. We have made many advances in terms of the algorithm and qualitative influences, the software itself, and its use within an organization. Today we offer NPD-RiskAssessorTM as a Software as a Service tool, to be used when and as needed.

Project teams know that they need to avoid failure. The key is to enable the team to gain a common understanding of where the risk is coming from and how significant of an impact it will have on the project. The easiest and most direct way to do this is through an established and reliable algorithmic model. NPD-RiskAssessorTM does just this. It help NPD teams identify and move faster on those specific risk factors that will influence their projects the most.

If your organization has an NPD project for which understanding and mitigating risk is desirable, consider learning more about this tool and our service through a demo using your project. It will move you a step closer to the fun of success.

————————–*** Note to Consultants and NPD software providers:
Are you interested in partnering with The Adept Group on NPD-RiskAssessor? We’d be glad to enter into a discussion. Simply send us an email at riskassessor(at)adept-plm.com
————————

Share this:

Related posts:

Featured Author

Paul O’Connor is an expert in the field of New Product Development. For over twenty-five years he has worked with executives and facilitated teams of senior managers. In 1984, Paul founded The Adept Group Limited, Inc.

Capitalizing on his skills in business strategy, marketing research, technology assessment, organizational process and team facilitation, Mr. O’Connor influences and guides the product development and innovation efforts of clients in both consumer and industrial markets, around the globe. Read More…